What on earth are . . . mahua?

Mid 2014, the China Daily carried an interesting article about a producer of a very traditional Chinese food, mahua (fried dough twists, whose name literally means ‘hemp flour’), that intends to finance its big plans through the modern means of offering its stock to the public.

This is an excellent occasion for a new item of my ‘What on earth are . . . ‘ blogs.

Guifaxiang, based in the northern port city of Tianjin, plans to make its debut on the Shenzhen Stock Exchange.

Founded in 1927, Guifaxiang would become the first publicly listed maker of such products in China if its plan wins approval.

The company realised more than 96% of its sales (RMB 462 mln in 2013) from the Tianjin market. 77% of this revenue was derived from mahua. It plans to raise RMB 570 mln through its initial public offering.

With the money raised, Guifaxiang plans to invest RMB 287 mln in expanding its production capacity. It produced 7748 mt of mahua last year, according to the prospectus.

The pictures in this blog show plain mahua and those produced by Guifaxiang

Mahua  Guifaxiang

The company also plans to speed up its expansion in China by opening 19 stores within three years of listing, with 10 stores in Tianjin, and nine others in the cities of Beijing, Shanghai, Shijiazhuang, Shenyang and Xi’an.

Here is a basic traditional recipe for mahua

 

Ingredients

Regular flour 200 gr
Eggs 1
Baking powder 1.5 gr
Salt 2 gr
Water 50 gr

 

  • Put all ingredients in a bowl and mix until you have a smooth dough. Leave the bowl for 30 minutes with a lid loosely placed on top.
  • Roll out the dough and cut out strips. Twist the strips into the typical mahua shape.
  • When the oil has reached the proper temperature, first through in one. After its has changed colour, through in the other mahua.

Modern industrial recipes also use: yeast, emulsifiers, sweeteners, butter, butter and cream flavours and sugar.

So what are the financial prospects for this stock? According to the prospectus, the company sold the mahua at RMB 47 per kg on average, making a profit of RMB 27.66 per kg. That seems quite reasonable. However, Guifaxiang does not seem to expect a lot of foreign interest, as its website is exclusively in Chinese.

Good prospects(?)

However, Chinese analysts seem to have high hopes for mahua, usually ranked among the ‘leisure foods‘ in Chinese statistics. I recently picked up two reports dedicated to this traditional snack; one concentrating on volumes, the other introducing the ways local companies develop their own special types of mahua.

The following graph shows the development of the mahua market in the past few years. The unit is RMB 100 mln. The researchers estimate that the value of this market will rise to RMB 6 billion in 2016.

MahuaVols

Regional varieties

Local variation manifests itself in flavour and texture. The main region, the Beijing – Tianjin area, produces relatively hard and crispy mahua. They are sometimes filled with sesame seeds or other additional flavourings. When you move on the west, to Shanxi, the mahua become softer, and are usually kept plain. There are also halal mahua in Ningxia.

Another region famous for its mahua is Shanzhou County of Sanmenxia (Henan). The sales of mahua have considerably increased the income for the farmers in Shanzhou. Mahua have been produced there in Daying village for generations and the snack can be dated back to the Qing Dynasty (1644-1911). The product has generated an output of RMB 28 million in 2015.

This map of China indicates the regions where mahua are popular, with small pictures of typical local variations in preparing and consuming mahua.

MahuaRegional

Eurasia Consult’s database of the Chinese food industry includes 36 producers of mahua.

Eurasia Consult Food knows the Chinese food industry since 1985. Follow us on Twitter.

Eurasia Consult Consulting can help you embed your business in Chinese society.

Peter Peverelli is active in and with China since 1975.

 

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Cost price of Chinese food groups

As I am spending considerable time in China at the moment, it has been less convenient to write a new item on this blog. However, it is also a great opportunity to collect tons of information that will be used for new topics and updating existing blogs.

I came across interesting material providing inside information about the breakdown of the cost price of a number of food products in China in production cost, advertising cost and sales cost.

We have similar costs in our part of the world, but the proportions may differ in China. The costs of sales are notoriously high in China, which is largely due to the long list of ‘fees’ levied by retailers. A Chinese supermarket will not approach manufacturers to sell their products in their shops. The manufacturers, or more usually, their agents, will request the retailers to give them a spot on their shelves. If the retailers agree, they will not only not (immediately) pay for the goods, they will present a bill for the ‘entry fee’, that has to be paid immediately, otherwise your goods will not appear on the shelves.

Manufacturers can expect numerous other fees like ‘barcode fee’, or ‘top shelf fee’. If you would like to have your product on the top shelf, on the eye level of the customers, you need to pay extra for that location.

 

Health tea

Cost type percentage
Production 15
Advertising 35
Sales 50

The production process of (health) tea is relatively simple: growing, picking, drying, fermentation, etc. Some are mixed with TCM herbs. However, each brand needs to invest considerably in advertising to make its unique properties clear to the prospects. Competition is fierce, which means that many types and brands are will contact the same outlet for a good space on its shelves. This is the reason for the very high ratio of sales costs in this category.

 

Seasoning products

Cost type percentage
Production 50
Advertising 10
Sales 40

These are products like soy sauce, vinegar, fermented bean sauce, five spice powder, jiang,  etc. They are products all consumers buy, so they need less advertising. This pushes up the ratio of the production costs for seasoning products. Sales costs are still considerable, but that is an item that will never be low in China.

 

Spirits

Cost type percentage
Production 34
Advertising 17
Sales 49

The production processes of the various spirits (baijiu) are very similar. It is far from high tech, which is the reason that the production cost is relatively low. This product group can be roughly divided in two types: the nationally famous brands and local brands. Both do not require much advertising. The famous brands are already famous and the local brands are known and consumed locally. Cost of sales is expensive as usual. Especially the cost of entering into a restaurant is high, at least as high as that of entering a supermarket. Also see my special item on baijiu.

 

Mineral water

Cost type percentage
Production 55
Advertising 12
Sales 33

Mineral water is not simply water pumped up from the soil and bottled. It is a kind of mining business, which comes with high exploration costs. Advertisement costs are relatively low, because it is still regarded as a high-end beverage. However, insiders expect that to change within the coming 10 years. The sales costs are still considerable, but lower than average. This is due to the fact that manufacturers of mineral water delegate virtually all sales activities to wholesalers. If they would do (part of) their own sales, all profit would be lost on ‘entry fees’ of retailers alone.

 

Soft drinks

Cost type percentage
Production 40
Advertising 20
Sales 40

This is a rather diverse product group, including carbonated drinks, fruit juice, tea beverages and sports drinks. The first two categories are low profit products. The latter two have more space for profits, but overall soft drinks are fast moving low profit goods. Most of the production cost is packaging, which needs to suit the typical way of consumption. A bottle must be as light as possible for easy carrying. The competition is killing, which pushes up the sales costs. Every player wants to get into as many sales points as possible. A particular problem for soft drinks is the enormous number of convenience stores in railroad stations, long distance bus stations and similar places. Advertising is necessary, but managing your sales channels is vital.

 

Leisure food

Cost type percentage
Production 65
Advertising 13
Sales 22

We have posted a dedicated item on this typical Chinese category earlier. It is an umbrella term comprising a broad range of good, including: peanuts, melon seeds, sausages, biscuits, beef jerky, fruit and vegetable chips, dried dates, and much more. This group includes a number of traditional local foods, but an even larger number of novel foods, designed to trigger the interest of Chinese travelers and tourists, who are always curious to try out something new. This is the reason for the high ratio of the production costs, which includes relatively high R&D costs. Advertising costs are lower, because these goods are purchased ‘on the run’. Sales costs are also considerably lower than for other product groups. The outlets that sell them are again the small stores at airports and railroad stations, or along freeways. These buy much smaller batches than a hypermarket like Carrefour and do so from a wholesaler, without negotiating endlessly about entry fees or shelf fees,

 

Milk

Cost type percentage
Production 53
Advertising 28
Sales 19

Milk has the highest ratio for production cost in the entire Chinese food and beverage industry. The source for these cost is located in the beginning of the value chain: the raising of dairy cattle. This is expense and a knowledge intensive industry. Advertising costs are high at the moment, as milk and dairy still have to fight with the bad image resulting from the melamine crisis in 2008. Image (re)building is more important than building the sales channels, hence the relatively low ratio for sales costs. Also see my item on traditional dairy products and formulated dairy products.

Eurasia Consult Food knows the Chinese food industry since 1985. Follow us on Twitter.

Eurasia Consult Consulting can help you embed your business in Chinese society.

Peter Peverelli is active in and with China since 1975.